The Effect of Information Quality on Optimal Portfolio Choice

38 Pages Posted: 10 Jan 2005

Date Written: August 2005

Abstract

Three types of agents acting on different information sets are considered: fully informed agents, insiders, and outsiders. Differences in information quality are shown to affect the properties of their optimal portfolios. For an outsider, the share of wealth invested in the stock is decreasing in the variance of the stock. However, for an insider, the effect of an increasing stock variance on the optimal portfolio weight is ambiguous. In a calibration to U.S. data, the confidence intervals of the insider's demand for the stock converge, whereas the outsider's confidence intervals become wider.

Keywords: incomplete information, learning, estimation risk, portfolio choice, hedging demands

JEL Classification: C13, G11

Suggested Citation

Lundtofte, Frederik, The Effect of Information Quality on Optimal Portfolio Choice (August 2005). Available at SSRN: https://ssrn.com/abstract=644261 or http://dx.doi.org/10.2139/ssrn.644261

Frederik Lundtofte (Contact Author)

Aalborg University Business School ( email )

Aalborg, DK-9220
Denmark

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